Audit Firm: Big4 Financial Performance 2015

The Big Four firms have recently announced their results for the fiscal year 2015. PwC has retaken number one spot from Deloitte as the world’s largest firm by revenue. KPMG is yet to announce its results.

A brief overview of the performance of these firms in comparison with the previous year is as follows.

PwC

PwC has recorded a global annual revenue increase of 10% to $35.4bn (£23.34bn), which represents its strongest growth in 10 years. Consulting now accounts for more than 30% of PwC’s total revenues after growing 18% to $11.2bn during the 2015 fiscal year. This was boosted by the acquisition of Strategy& (formerly Booz & Company) in April 2014. Revenues in PwC’s auditing division grew more slowly, rising 6.2 per cent to $15.2bn in a year marred by the profit misstatement scandal at Tesco, a PwC audit client.

According to Dennis Nally, Chairman of PricewaterhouseCoopers International Limited,

“As we look at the results for the last 12 months, all of our lines of service showed really positive growth – led by Advisory which is up 18%, Tax up 7% and our Assurance business notwithstanding some really difficult competitive market pressures – up 6%.”

DELOITTE

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries.

Deloitte member firms (Deloitte) reported aggregate revenues of US$35.2 billion for the fiscal year ended 31 May 2015 (FY15), representing 7.6 percent growth in local currency terms.

EY

EY announced combined global revenues of US$28.7b for its financial year ended 30 June 2015. This represents an 11.6% increase over financial year (FY) 2014 revenues in local currency, outpacing FY14 growth (which had increased by 6.8% over FY13).

All of EY’s service lines continued to grow in FY15 ahead of their FY14 growth: Advisory grew 17.6% (vs. 14.4% growth in FY14); Assurance 8.1% (vs. 4.5% in FY14); Transaction Advisory Services (TAS) 15.5% (vs. 6.5% in FY14); and Tax 10.3% (vs. 4.3% in FY14).

In FY15, EY headcount reached 212,000 globally – an all-time high.

A graphical representation of the performance of these three firms is shown for comparison purpose.

Head Count Graph

 Revenue Graph

KPMG

KPMG is due to report its 2015 results in December. KPMG International Cooperative ("KPMG International") is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. We are presenting here KPMG’s 2014 and 2013 performance comparison.

The KPMG network delivered strong growth and recorded-high revenues of USD24.8 billion for the 2014 fiscal year, an increase of 6.3 percent in local currency terms over the prior year (2013), recording growth across Audit, Tax and Advisory.

Head Count Graph

Revenue Graph

References:

• http://www.pwc.com/gx/en/about-pwc/global-annual-review-2015/campaign-site/pwc-global-annual-review-2015.pdf
• http://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/gx-gr15-summary-final.pdf
• http://www.ey.com/GL/en/Newsroom/News-releases/news-ey-reports-2015-global-revenues-up-eleven-point-six-percent
• https://home.kpmg.com/xx/en/home/media/press-releases/2014/12/kpmg-delivers-strong-growth.html

Audit Firms: Financial Performance 2011

What do we know about financial performance of accounting firms, especially the Big Four firms? I planned to do some analytics in this area and provide my readers with results this week. However, the smart guys from Big4 site have already done this work and all I want to do is to provide some additional considerations.

Thus, this blog post is going to discuss revenues of accounting firms.

Big4: Business as usual

The Table 1 represents revenues of the Big4 accounting firms and growth rates.

Table 1: Big4 Revenues and Growth Rates 

Figure 1: Combined Big4 Revenues

I would consider following points:

First, generally the Big4 firms have overcome consequences of financial crisis, i.e. revenue of 2011($103.6 bln.) exceeded the pre-crises level of 2008 ($101.3 bln.). However, E&Y did not manage to achieve pre-crisis revenues.

Second, PwC showed good performance in 2011 with 10% growth and regained dominant position in Big4 after it was given in to Deloitte in 2010.

Third, Deloitte is distinguished by the highest compound annual growth rate (CAGR) for the period of 2007-2011. Meanwhile, E&Y has reported the lowest CAGR of all Big4 firms.

Big4 Audit Services

The blog is about audit, so we can’t avoid talking about audit fees percentages in total revenue, which are reported in Table 2.  J

Table 2: Big4: Audit Fees Share in Total Revenue

Figure 2: Combined Big4 Audit Fees Share in Total Revenues

The sharp decrease of E&Y’s audit fees share in 2008 should not mislead us. The issue is that E&Y reported the combined figures of assurance and advisory services before 2008. That is why, for illustration purposes I depicted tendencies in audit/assurance revenues starting from 2008 year.

The tendency of decline in audit & assurance services might indicate two issues. First, the accounting firms are eager to provide consulting/advisory services, especially in economic crisis time, when clients need some advice on how to improve their businesses. Second, clients might be dissatisfied by the level of assurance services provided: accounting firms can not provide in this area something special because of strict unification of reports, or e.g. some clients wanted to delist themselves from stock exchanges. Anyway, this is a very deep and serious issue, which deserves to be discussed separately.     

Non-Big4 Accounting firms

I decided to compare information about Big4 firms with 2 big accounting global networks, BDO and Grant Thornton International (GTI). I picked up these 2 firms because they publish their reports online and information was rather accessible. According to Accountancy Age global ranking BDO and GTI, occupied 5^th and 7^th places respectively in 2010.

Table 3: BDO and GTI Revenues and Growth Rates

Figure 3: Combined BDO and GTI Revenues

Remarkably, the combined revenues of BDO and GTI are 2.4 times less than their closest Big4 rival, KPMG! BDO has shown good CAGR for 2007-2011, and what could be also mentioned is that the decline in revenues of -2% in 2009 was the lowest comparing with Big4 and GTI. Regretfully, GTI was not able to achieve pre-crises revenues ($4 bln.)

Non-Big4 Audit Services Share

I made the same exercise here as in case with Big4 to provide information about audit revenues, see Table 4 and Figure 4.

Table 4: BDO and GTI: Audit Fees Share in Total Revenue

Figure 4: Combined BDO and GTI Audit Fees Share in Total Revenues

Quite interesting is that the tendency for audit and assurance services growth in BDO and GTI differs from the one shown by Big4 firms. Both firms increased share of audit fees in structure of their revenues in 2009 (from 50% to 53%), and were able to keep these fees on the same level.

Unfortunately, the picture here could be distorted by BDO reporting. The firm reports audit and accounting under the same line. Though report does not specify what sorts of “accounting” services are provided, it might be suggested that these are the services related with help to clients in financial statements compilation, i.e. having non-assurance nature.

Comments are welcomed!

If you have anything to add about performance of Big4 or the other global accounting firms, please feel yourself comfortable to leave a comment. Maybe you have some insightful information about accounting firms’ balance sheets or cash flows J

PS Please, do not forget to vote for your top 3 favorite subjects. The polls are going on the right-hand side of the blog. The rules and explanations regarding subject are here.

Sources: 

1. Reports and press-releases placed on the web-sites of the mentioned firms.

2. Big4.com analysis. 

New Audit Order: Take 2. Remodeling audit services

The audit profession is very conservative by its nature but to survive any organism must be flexible, open for changes and new trends.

How can we modify meaning of “audit services” terminology? How could it influence audit firms market and multinational companies (MNC)?

New services – more analysis

Let’s be clear about it. Society demands from auditor to give the opinion about financial soundness and performance of listed companies, given that auditors have extensive access to information. Green Paper of  European Commission suggests that ‘forward looking analysis’ of ‘large listed companies’ might be ‘real value added to the stakeholders’.

So auditors are going to move to the business of credit rating agencies and financial/equity analysts. And I would suggest this is very good news! Auditors are extremely fit for this job: auditors have enough expertise, knowledge and analytical skills to provide sound analysis of companies, moreover they know degree of reliability and relevance of each line of financial statements.

Format of product: three-fold report

We have already had reports with two types of opinions: financial statements opinion and effectiveness of internal control (over financial reporting) opinion. Under SEC requirement Companies listed in US need to be audited in accordance with Public Company Accounting Oversight Board (PCAOB) standards (after enacted SOX legislation). See, for instance, extracts from Hershey’s financial statements audit report:

Source: http://www.thehersheycompany.com/investors.aspx?ICID=HCOMP1005        

Obviously, the third part could be added to this report. Brief paragraph about financial viability of company (going concern analysis) which must be accompanied by detailed analysis of company’s previous financial year performance and financial perspectives based on evidences  gathered as at  audit report date. The brief paragraph in the body of report together with detailed analysis should give unambiguous understanding of auditor’s opinion about the company financial and business perspectives.  

How to do – technique

Some words about audit team management. In my opinion, in the above case scenario the audit team should split at least in 2 parts: financial statements audit team and business audit team. The first one would be concerned with internal controls and financial statements. The business audit team would have to spend time on analysis. These split in two roles is necessary to avoid any eye-soaping of members of audit team and would encourage fresh look on business activity and company’s reports by business team.  Definitely, both team must work together and question each other on their findings, inconsistencies and misunderstanding. For example, such procedures like overall analytical review supposed to be carried out in cooperation.

Responsibility of auditor: less regulated more active and open?

Responsibility of auditors is very complicated issue to discuss. There are similar kind of services provided by other companies, but their responsibility is not as much auditors’. What does hold our profession from development? How does responsibility influence on competition?

I suggest responsibility should be limited to quality of services provided. In any case, dissatisfaction by work of auditors whether they failed to predict bankruptcy of Lehman brothers or failed to reveal fraud in Enron is caused by bad quality of audit work; non-compliance with audit standards or weak audit standards itself. If society is not satisfied by quality audit standards then it is time to change them, but there is no use to blame auditors, because they complied with wrong standards.

On the hand we have market, which is supposed to regulate audit business. If shareholders are not satisfied with quality of audit services they hire another auditor and bad reputation would not let providers’ of bad services to succeed.

Some considerations about other industries…

Let us look on credit rating agencies. There are no much regulations about them. They do not have such comprehensive quality standards as accountants do. But it is also quite oligopoly market (Big three:  Standard & Poor's, Moody's Investor Service and Fitch Ratings). The agencies also has faced severe criticism after financial crunch for not being accurate in their assessment of companies’ rating. This reminds me something…

There is another interesting industry which is worth mentioning: the higher education institutions. Suppose, I hired MBA graduated from Yale University with GPA = A+. After we signed one year labour contract it have been appeared that my new hire has had idea neither  about efficient market hypothesis nor net present value analysis. What should I do? Should I sue Yale University for that? Does it mean that there is unsatisfactory education quality control and attesting system at University? Or is there anything wrong with my  recruitment system?

Anyway I think it is time to make Porter’s five force analysis and PESTEL for regulators and audit professionals to assess:

1)      if legal, social and political barriers have been already rather high and suppress competition in industry;

2)      if lowering of those barriers might increase competition level;

3)      if increased completion level might positively impact quality of audit services and provide additional value for society.

There are lots of work to be done and long journey to be made.